OCC Reports First Quarter Bank Trading Revenue of $9.8 Billion

WASHINGTON — U.S. commercial banks reported record trading revenues of $9.8 billion in the first quarter of 2009, compared to losses of $9.2 billion in the fourth quarter of 2008, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"Banks continued to benefit from solid client demand and wide intermediation spreads in the first quarter, and from lower write-downs on legacy assets," Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. "Bank trading revenues have a definite seasonal pattern, with the first quarter of each year often the strongest due to increased risk management activity by bank clients."

Ms. Dick noted that increases in banks' own credit spreads led to increased trading revenues due to declining values of bank trading liabilities. While trading results were very strong even without considering the impact of liability value changes, it is important to recognize that such changes did contribute meaningfully to first quarter performance, she said.

The impact from changes in bank credit spreads can be very volatile. "Some of the positive impact on bank trading results in the first quarter has reversed in the second quarter, due to improving perceptions of bank credit health," Ms. Dick said. "That's a very positive development, but the increase in the value of trading liabilities from lower bank credit spreads means bank trading revenues will face strong headwinds in the second quarter."

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $2 trillion (nearly 1 percent) in the first quarter to $202 trillion. The increase resulted from the continued migration of investment bank derivatives activity into the commercial banking system. Interest rate contracts increased $5 trillion to $169 trillion, while credit derivatives fell 8 percent to $15 trillion.

The OCC also reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $105 billion, or 13 percent, to $695 billion.

Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 96 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.

Credit default swaps are the dominant product in the credit derivatives market, representing 98 percent of total credit derivatives.

The number of commercial banks holding derivatives increased by 53 in the quarter to 1,063.